(Reuters) - GameStop executives are tired of hearing about investors who bet against the stock of the video game retailer that they have given them a nickname: shallow divers.

The knock against shareholders with a negative short-term view of the stock is meant to prove a point: take a more thorough view of GameStop to understand it will not end with the same fate as movie rental chain Blockbuster, which filed for bankruptcy protection in 2010.

"Are we paralyzed in fear that our business model isn't working? Not at all ... Investors are a trailing indicator," GameStop Chief Executive Paul Raines said in an interview.

Raines and his team have their work cut out for them, as a growing number of their investors are getting pessimistic. Hedge fund manager James Chanos of Kynikos Associates singled out GameStop at a conference last fall for following in the footsteps of Blockbuster and struggling UK entertainment retail chain HMV Group in slides he presented entitled "digital distribution destruction."

"Packaged games are pressured by growth in casual, mobile and social network games," and game publishers, such as Electronic Arts "are increasingly direct competitors," Chanos said in a slide show reviewed by Reuters.

About 41 percent of GameStop's shares are now held by short sellers who are betting that its stock price will fall instead of rise over the long-term. That is up from 30 percent in January and more than double the amount of retailer Best Buy, which has short interest of 17 percent and has been posting weak quarterly sales.

Raines and GameStop's other top executives have become well-versed in explaining to investors why it will not become the next Blockbuster. They note that GameStop currently has no debt on its balance sheet, which is rare for a retailer -- and unlike Blockbuster -- it has short-term, flexible leases on its 6,200 global stores and much smaller square footage.

Raines has been driving change at GameStop since being recruited to lead the company from Home Depot in 2008. Raines has challenged executives to find a way to sell digital game downloads in stores, something that had not been done before. Raines also set aside $100 million for acquisitions related to online gaming and helped devise a customer loyalty program to ensure that gamers keep coming back to stores.

"We were on a mission and you can't accuse us of not driving a heck of a lot of change," Raines said.

The company says that the plan Raines and his team devised has worked. GameStop, which is based in Grapevine, Texas just outside of Dallas, invented technology that lets gamers buy access codes for games in stores and then download the content at home, a major driver of its $453 million in digital sales last year.

The loyalty program Raines devised now has 17 million members and is growing rapidly. The program helps GameStop gain share in its most profitable business of buying and selling used games.

GameStop has gone from having about $1.2 billion in debt after it bought Electronics Boutique in 2005 to generating an estimated $500 million in free cash. Of the 19 analysts who follow GameStop, none of them have a "sell" rating on the stock while 11 analysts have a "buy" or "strong buy" rating, according to Thomson Reuters data. Eight analysts have a "hold" or "underperform" rating.

But GameStop's share price, trading around $22, has fallen about 10 percent this year, while the S&P's retail index has gained 18 percent. Revenue has flattened year over year after growth as high as 24 percent in 2009, which could explain why it catches the eye of the shorts.

"They're trying to do the right things but they're fighting a losing battle of selling physical games in a digital world," said Jeff Matthews, an investment manager who has invested in long and short positions in GameStop in the past but is no longer a shareholder.

Short interest in GameStop began rising steadily in 2007 and increased when video stores started struggling, said Dan DeMatteo, who was GameStop's CEO from 2008 and 2010 and is now the executive chairman of the board.

CHANGE AND CHALLENGES

There is no doubt that the video game industry has changed since GameStop was spun off from Barnes and Noble in an initial public offering in 2002. Total retail sales of video game products were down 20 percent in February compared to a year ago, according to research firm NPD.

In March, Game Group, the British video game retailer which competes with GameStop in Europe, filed for court protection from creditors and had to cut more than 2,100 jobs.

But Zynga, one of the hottest video game companies, sees most of its sales from games played on Facebook.

To combat the secular changes and boost its digital efforts, GameStop spent some of the $100 million Raines earmarked for acquisitions to buy two digital gaming companies last year, Spawn Labs and Impulse.